HMRC has begun the process of overhauling its operation of the IR35 regime for personal services companies with new guidance that sets out some basic risk factors that will affect a contractor’s chances of being investigated.
The overhaul will mean an increase in IR35 investigations, the tax department confirmed.
As expected following leaks last month, the 12 business entity tests set out in HMRC’s 47-page intermediaries legislation guidance note are illustrated by six example scenarios. HMRC said the tests are designed to build up a picture of how a contractor’s business works and how they provide their services. The testss include:
- Business premises test - Does the business own or rent business premises separately from the contractor’s home or end client’s premises?
- PII test - Does the contractor need professional indemnity insurance?
- Efficiency test - Has the business had the opportunity in the past two years to increase its revenue by working more efficiently?
- Assistance test - Does the business employ any workers who bring in at least 25% of the yearly turnover?
- Advertising test - Has the business spent over £1,200 on advertising in the past year; entertainment does not count as advertising
- Previous PAYE test - During the past year, has the end client engaged you with no major changes to your working arrangements
- Business plan test - Does your business have a business plan with a regularly updated cash flow forecast, and does it have a business bank account, identified by the bank as such and separate from your personal account?
- Repair at own expense test - Would the business have to bear the cost of rectifying any mistakes?
- Client risk test - During the past two years, has the business been unable to recover payment amounting to more than 10% of yearly turnover?
- Billing test - Does the business invoice for work carried out before being paid and negotiate payment terms?
- Right of substitution test - Does the business have the right to send a substitute?
- Actual substitution test - Has the business hired anyone in the previous two years to do the work it has taken on?
The HMRC guide explains that the tests are not set in stone, and are an extension of the risk-based approach to extends to all of its investigations.
Paul Mason, manager of the contractors division at investigations insurance specialist Abbeytax, met with HMRC officials this week to discuss the new tests. “HMRC’s new approach hasn’t changed a great deal,” he told AccountingWEB.
“They already undertake risk assessments of who is most likely for investigation. The business entity tests are something you can use to self-assess to see how you score by their internal rating. But they aren’t telling us what the detailed risk criteria are because of the fear people will arrange their affairs accordingly.”
As every other adviser or specialist in this field would agree, Mason added that the business entity tests are just a diagnostic tool. The actual application of IR35 will always come down to employment status factors that must be tested against case law going back to the 1968 Ready Mixed Concrete decision.
But along with the new guidance, Mason did learn that HMRC is drawing together specialist IR35 teams at offices in Salford, Edinburgh and Croydon to pilot the new approach to investigations. The objective of the exercise will be to address the risk of avoidance of employment taxes, including National Insurance, according to HMRC. “This will mean that there will be an increase of the number of investigations opened for IR35 reasons over the coming year and subsequent years,” a spokesman confirmed to AccountingWEB.